Q: I am planning to sell my house in the near future and have been told by my bank that my present loan is "assumable" and can be "taken over" by the new owner. Is this a better deal for the buyer than a totally new loan? Also, does the new buyer have to qualify for this loan?

A: The simple answers are usually NO and usually YES. Let’s take a closer look. In this column you will often hear me refer to the good old days. My reference to the good old days is usually anything approximately 20 or more years in the past. Having said that, in the good old days assumable loans were just that: truly assumable loans. My meaning of assumable is totally different from today’s version of assumable.

Some 20 years ago you could take title "subject to" an existing FHA or VA loan and merely pay a records update fee of $25-$50. In the late 1970’s and early 1980’s, many conventional lender loans could also be taken "subject to," due to a famous California court case (Wellenkamp v. Bank of America).

Truly assumable loans used to be great for real estate transfers. The concept was that interest rates might be at 9% but the seller had a fixed rate loan at 7%. The buyer would buy the property and pay a small records fee and reap the benefit of a below interest fixed rate loan.

There was no qualification and no new loan fees. These low interest, fixed rate "assumable" loans were the core of many real estate sales that otherwise could never have been accomplished when current interest rates were 9 to 14%.

Today’s "assumable" loans are a different matter. In almost every case, the new buyer needs to "fully qualify," as if they were applying for a new loan. In addition, the buyer generally has to pay a loan fee in an amount similar to a loan fee on a brand new loan. In most cases the term "assumable loan" is a marketing ploy leading the borrower to believe that this is a real benefit to a future buyer at the time of the sale. In most cases there really is no benefit, especially if this is an adjustable rate loan with new points and new qualifications. If a new buyer can qualify for a new loan and pay new loan fees, there is usually little reason that they would want to "assume" your existing loan.

Check with your lender and ask if the buyer has to qualify for the loan "just like a new loan," and see if there is any true break in the fee for assuming rather than getting a brand new loan. There may be some real savings in appraisal fees, but I doubt that you will find many fixed rate loans today that are assumable at a low interest rate without paying a whole bunch of new fees and costs.

Peter Rosenthal
VIP Trust Deed Company